Traditional IRA to Roth recharacterization limits and withdrawal

[goyal_raj]

Hi,

I made a contribution to the traditional IRA in Apr 2021 for year 2021 and recharacterized it to a Roth IRA as I can't contribute to a traditional IRA due to income limits and 401k. However, as I prepare to file the tax for 2021 in Turbo tax, It says that my AGI is too high and this is excess contribution (my AGI is over 208k). It also applied some tax to the transaction as the calculated tax due number went up too.

Do I have to withdraw the full amount and if yes, how to do it? And how to report it in Turbo tax if I withdraw it now.

If not, can I just pay that tax and leave it like that?

Thanks for the help.

Rajesh

[macuser_22]

You probably did not enter the Traditional IRA contribution properly and say you switched it to a Roth (recharactorized).  Be sure you enter it as a Traditional IRA contribution.

Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR  Use the "Tools" menu  (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

If you qualify for a deduction then TurboTax will ask if you want to make it non-deductible. If you do then a 8606 form will be added with the non-deductible amount on line 1.

[goyal_raj]

Thanks.

Here is what i did Under Retirement and Investments:

Select the kind of IRA- i checked on Traditional IRA

Is this a repayment of a retirement distribution- No

Tell us how much you contributed for 2021, even if you later transferred some or all of  it to Roth - entered 6000

Tell us how much you transferred- how much did you switch or recharacterize to a Roth IRA- 6000

Your IRA Explanation statement- "not eligible for a traditional IRA'

Any excess contributions before 2021- No

Any non deductible contributions to Rajesh's IRA (traditional IRA from 2020 or prior years)- no (since I recharacterized them all)

Is this a repayment of a retirement distribution- No

It says "Your income is too high to contribute. It is an excess contribution".

My Vanguards statement also shows the following:

1. Gross Distribution- 6000

2a. Taxable amount- 6000

2b. Taxable amount not determined-(X)

7. Distribution code- 2

IRA/SEP/SIMPLE- (X)

What should I change?

Thanks

[macuser_22]

---

@goyal_raj wrote:

Thanks.

Here is what i did Under Retirement and Investments:

Select the kind of IRA- i checked on Traditional IRA

Is this a repayment of a retirement distribution- No

Tell us how much you contributed for 2021, even if you later transferred some or all of  it to Roth - entered 6000

Tell us how much you transferred- how much did you switch or recharacterize to a Roth IRA- 6000

Your IRA Explanation statement- "not eligible for a traditional IRA'

Any excess contributions before 2021- No

Any non deductible contributions to Rajesh's IRA (traditional IRA from 2020 or prior years)- no (since I recharacterized them all)

Is this a repayment of a retirement distribution- No

It says "Your income is too high to contribute. It is an excess contribution".

My Vanguards statement also shows the following:

1. Gross Distribution- 6000

2a. Taxable amount- 6000

2b. Taxable amount not determined-(X)

7. Distribution code- 2

IRA/SEP/SIMPLE- (X)

What should I change?

Thanks

---

You are mistaken on your original question.  High income and 401(k) does not prevent a Traditional IRA contribution but it can prevent the ability to *deduct* it.  It would just become an non-deductible Traditional IRA contribution but high income can make a Roth contribution not eligible at all - that is probably your problem.    You are not eligible to recharactorize to a Roth if you cannot contribute to a Roth at all because if high income.

If your income is too high for a Roth contribution and you do not want a non-deductible Traditional IRA contribution then your only choice to to request a "return of contribution" and any earnings from the IRA custodian.   This must be done before the due date of the tax return or extended due date if an extension is filed.

See these IRS articles for the deduction limits and Roth contribution limits.

See this IRS link for Traditional IRA deduction limits when covered by a retirement plan at work.

https://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

See this IRS article for Roth contribution limits:

https://www.irs.gov/retirement-plans/roth-iras

If you do not remove the excess that is now in the Roth, it will be subject to a yearly 6% penalty that will repeat each year that it remains in the Roth.

[goyal_raj]

Thanks for your reply.

I would want it to be a non deductible Traditional IRA contribution and then recharacterized to Roth. In my understanding, a back door Roth recharacterization can be done without income limits. Is that right?

So if I were to indicate this as non deductible, how do I do that in Turbo tax so that I do not see this as excess contribution?

[macuser_22]

A "Backdoor Roth" and a recharacterization are totally different and a recharacterization is NOT a backdoor Roth.

A backdoor Roth consists of making  a normal Traditional IRA contribution and make it non-deductible.

Then *convert* that Traditional IRA to a Roth IRA (NOT recharactorize).

If you already had the IRA custodian recharactorize then you need to undo that with a "return of contribution and start over which a non-deductible Tradional IRA contribution.

Here are the steps for a backdoor Roth:

The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.  [Congress has been talking about changing the tax law to prohibit this but has not yet done so.]

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly taxable.

First you must enter your Traditional IRA contributions (if there were 2020 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2021.     (Usually zero unless you also made a 2020 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2021 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2021, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion

Here are the steps